What Do You Think of a Car Payment?
The Question
I shared my perspective this morning when I was asked by a friend of mine, “How do you feel about a car payment?”
Mark has a $280 car payment on a used car, a cash equivalent in the bank for the entire balance, and he wants to start saving for the future. After being debt free, he has accumulated some household debt (medical), and is a little irritated that he lost the discipline. His savings are healthy, but not where he wants it to be. Functionally and spiritually, he needs to establish a security plan for his wife and 4 children as soon as he can.
As far as the car goes, he put down 50% in cash as a result of an insurance settlement from a recently totaled vehicle. Mark is in a positive equity position. His payment is $280 and he has the cash equivalent in the bank.
Keep the Payment
My advice.... keep the car payment.
Here's why.... He can exit a debt scenario in 2 ways:
1. Pay off the car tomorrow in cash, or
2. Sell the car for the equity that he currently has in it.
And he can build the savings plan which satisfies his emotional drive to support his family in the future.
Why This Is Different
Why this advice is different from other conversations I've had:
1. New cars, in the traditional financing models, have a serious negative equity position, meaning the purchaser generally cannot exit the debt scenario without putting in extra cash, and still need a car.
2. Most people who finance a car do it because they are unable to pay cash.
3. Financed cars are rarely paid off since the owners generally keep the vehicle for 3-4 years and never obtain title. They trade or upgrade, which restarts the debt cycle.
The Lifestyle Debt Trap
What gets people into trouble is lifestyle debt. For example, people add debt by upgrading perfectly functional kitchen appliances. There is nothing appreciably different between the functional items and the new matching gadgetry. The function is the same and there is no need associated. The same goes for financing a new purse, a couch, or a car when one already has several well-functioning items. A 2012 Toyota is just as functional as a 2023 BMW. Lifestyle debt is to be avoided.
Mark Is Different
So, while I am not advocating debt, Mark did not go into debt to upgrade a car just because he wanted something new and shiny. He had a need as a result of a car accident and prudently put a good chunk down. Mark is going to pay this car off quickly and will drive it until forever.
The Plan
So, Mark....
• Make a household budget, list the debts smallest to largest.
• Make minimum payments on the 0% interest items. Pay like crazy on everything but the car and house.
• Fund the emergency fund in an account separate from the household operating account.
• Put a date on the calendar at the 50% mark of the car payment schedule. (48-month note, put a date 24 months from now). That is the day you pay off the car.
The Bet
If I had to make a bet.... Mark will diligently pay down his medical debt, will build his savings, and will pay this car off in 12 months once he feels secure in his progress.
Mark, you have the right spirit. I feel you are ok with this car payment.
